M/s Trilogy E- Business Software India Private Limited, Bangalore V. DCIT, Bangalore

ITA 1054/BANG/2011

• Counselvise Citation: 105421114 RSA 2011
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 11-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITIDR
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 92D; 92E; 234B; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.1054/BANG/2011 ASSESSMENT YEAR : 2007-08 M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD., NO.1/2, LALITHA NILAYA, 4 TH CROSS, RMV IIND STAGE, BHOOPASANDRA, BANGALORE 560 094. PAN : AABCT 2328Q VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, C.A. RESPONDENT BY : SHRI S.K. AMBASTHA, CIT-I(DR) DATE OF HEARING : 17.09.2012 DATE OF PRONOUNCEMENT : 23.11.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 30.09.2011 OF THE DY.CIT, CIRCLE 12(4), BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT. 2. GROUND NOS. 1 TO 16 RAISED BY THE ASSESSEE IS WI TH REGARD TO THE ADDITION TO THE TOTAL INCOME BY WAY OF ADJUSTMENT T O THE ARMS LENGTH PRICE ITA NO.1054/BANG/11 PAGE 2 OF 62 ( ALP ) TO AN INTERNATIONAL TRANSACTION CARRIED OUT BY TH E ASSESSEE U/S. 92CA OF THE ACT. THESE GROUNDS READ AS FOLLOWS:- THE LEARNED ASSESSING OFFICER, LEARNED TRANSFER PR ICING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL HAVE ERRED I N :- 1. PASSING THE ORDER WHICH IS BAD IN LAW; 2. PASSING THE ORDER DISREGARDING THE PRINCIPLES O F NATURAL JUSTICE; 3. MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE; 4. PASSING THE ORDER WITHOUT DEMONSTRATING THAT AP PELLANT HAD MOTIVE OF TAX EVASION; 5. IGNORING THE FACT THAT THE MEMBERS OF DISPUTE R ESOLUTION PANEL ALSO BEING JURISDICTIONAL COMMISSIONER/DIRECT ORS OF INCOME TAX OF THE APPELLANT, THE CONSTITUTION OF TH E DISPUTE RESOLUTION PANEL IS BAD IN LAW; 6. NOT APPRECIATING THAT THE CHARGING OR COMPUTATI ON PROVISION RELATING TO INCOME UNDER THE HEAD PROFIT S & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION UNDER CHAPTER X IS BAD IN LAW; 7. ADOPTING A FLAWED PROCESS OF ISSUING NOTICES U/ S 133(6) AND RELYING ON THE SAME WITHOUT PROVIDING COMPLETE INFORMATION AND AN OPPORTUNITY TO CROSS EXAMINE THE COMPANIES CONCERNED; 8. REJECTING THE COMPARABLES SELECTED BY THE APPEL LANT AND REJECTING TRANSFER PRICING ANALYSIS OF THE APPELLAN T; 9. PERFORMING FRESH TRANSFER PRICING ANALYSIS AND ADOPTING INAPPROPRIATE FILTERS IN DOING FRESH TRANSFER PRICI NG ANALYSIS; 10. SELECTING INAPPROPRIATE COMPARABLES; 11. REJECTING ADDITIONAL COMPARABLES PROPOSED BY T HE APPELLANT; 12. INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES AND THE APPELLANT; ITA NO.1054/BANG/11 PAGE 3 OF 62 13. TREATING FOREIGN EXCHANGE GAIN OR LOSS AND PRO VISION FOR BAD DEBTS AS NON-OPERATING IN NATURE AND FRINGE BEN EFIT TAX AS PART OF OPERATING COST; 14. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LE VEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLA NT AND THE COMPARABLE COMPANIES; 15. NOT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPTING MANY (OR ANY MINIMUM) COMPANIES AS COMPARABLES AND THAT THE APPELLANT COULD JUSTIFY THE PRICE PAID/CHA RGED ON THE BASIS OF ANY ONE COMPARABLE ONLY; 16. NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE MEN TIONED IN THE PROVISO TO SECTION 92C(2). 3. THE ASSESSEE IS A COMPANY. IT WAS INCORPORATED IN JUNE, 2000. M/S. VERSATA INTERNATIONAL INC., USA HOLDS THE ENTI RE SHARE CAPITAL OF THE ASSESSEE, EXCEPT TWO SHARES. THE ASSESSEE PROVIDES SOFTWARE RESEARCH & DEVELOPMENT SERVICES FOR VERSATA INTERNATIONAL INC. ON A CONTRACT BASIS AND AS REQUESTED BY VERSATA INTERNATIONAL INC. IT IS N OT IN DISPUTE BEFORE US THAT THE TRANSACTION OF PROVIDING SOFTWARE RESEARCH & DE VELOPMENT SUPPORT SERVICES BY THE ASSESSEE TO VERSATA INTERNATIONAL I NC., WAS AN INTERNATIONAL TRANSACTION WITH THE ASSOCIATED ENTERPRISE ( AE ) AND THEREFORE THE PRICE AT WHICH THE ASSESSEE RENDERS SERVICES TO ITS AE HA S TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS LAID DOWN BY SECTION 92C OF THE ACT. DURING THE FINANCIAL YEAR 2006-07, THE ASSESSEE PROVIDED SOFTW ARE RESEARCH & DEVELOPMENT SUPPORT SERVICES TO ITS AE AND WAS REMU NERATED ON A COST PLUS BASIS. THE TOTAL VALUE OF INTERNATIONAL TRAN SACTION WITH RESPECT TO THE PROVISION OF SOFTWARE RESEARCH & DEVELOPMENT SUPPOR T SERVICES BY THE ASSESSEE TO ITS AE WAS Q 47,46,66,638. ITA NO.1054/BANG/11 PAGE 4 OF 62 4. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRI CE CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED THE TRANSACTIONAL NET MARGIN METHOD ( TNMM ) AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. THE ASSESSEE ADOPTED OPERATIN G PROFITS TO COST AS THE PROFIT LEVEL INDICATOR ( PLI ). THE LIST OF COMPARABLES ULTIMATELY CHOSEN BY THE ASSESSEE FOR COMPARABILITY IS ANNEXED AS ANNEXURE-I TO THIS ORDER AND THE PROCESS BY WHICH THE SAME WAS ARRIVED AT IS DETAILED IN THE ANNEXURE TO THE REPORT IN FORM 3EB. THE PLI OF TH E ASSESSEE AS ARRIVED AT IN THE SAID REPORT IS ANNEXED AS ANNEXURE-II TO THIS ORDER. IT CAN BE SEEN FROM ANNEXURE-I THAT THE ARITHMETIC MEAN OF CO MPARABLES WAS COMPUTED AT 14.53%. THE PLI OF THE ASSESSEE (AS PE R ANNEXURE-II) WAS COMPUTED AT 9.98%. IT WAS THE CLAIM OF THE ASSESSE E THAT EXERCISING THE OPTION OF DETERMINING THE ALP BETWEEN +/- 5% OF THE ARITHMETIC MEAN OF THE COMPARABLE PRICES, THE RANGE OF OPERATING MARGIN WO ULD BE BETWEEN 8.80% & 20.25% ON OPERATING COSTS. SINCE THE ASSESSEES OPERATING MARGIN ON OPERATING COST WAS WITHIN THE ARMS LENGTH RANGE, T HE ASSESSEE CLAIMED THAT ITS INTERNATIONAL TRANSACTION WAS AT ARMS LEN GTH. 5. THE FILTERS OR CRITERIA ADOPTED BY THE TAX PAYE R IN ITS TP STUDY AND THE REMARKS OF THE TRANSFER PRICING OFFICER ( TPO ) TO WHOM THE AO REFERRED DETERMINING OF ALP ON SUCH APPROACH WERE A S FOLLOWS:- ITA NO.1054/BANG/11 PAGE 5 OF 62 FILTERS OR CRITERIA ADOPTED BY THE TAXPAYER IN ITS TP STUDY: SL. NO. PARTICULARS REMARK OF THE TPO 1 COMPANIES FOR WHICH SUFFICIENT FINANCIAL DATA IS NOT AVAILABLE TO UNDERTAKE ANALYSIS THIS IS AN APPROPRIATE FILTER. HENCE, IT IS ACCEPTED. 2 COMPANIES THAT HAVE CEASED BUSINESS OPERATIONS OR ARE CURRENTLY INACTIVE THIS IS AN APPROPRIATE FILTER. HENCE, IT IS ACCEPTED. 3 COMPANIES UNDERTAKING SIGNIFICANTLY DIFFERENT FUNCTIONS COMPARED TO THE TESTED PARTY THIS IS AN APPROPRIATE FILTER PROVIDED THE DECISION IS BASED ON OBJECTIVE CRITERIA AND NOT BY SELECTING / REJECTING BASED ON THE MARGIN OF A COMPANY. 4 COMPANIES THAT DO NOT HAVE SIGNIFICANT (>25%) FOREIGN EXCHANGE EARNINGS THIS IS AN APPROPRIATE FILTER. HENCE, IT IS ACCEPTED. 5 COMPANIES WHICH HAVE BEEN MAKING PERSISTENT OPERATING LOSSES THIS IS AN APPROPRIATE FILTER. HENCE, IT IS ACCEPTED. 6 COMPANIES THAT HAD SUBSTANTIAL (EXCESS OF 25%) TRANSACTIONS WITH RELATED PARTIES IT IS AN APPROPRIATE FILTER TO ELIMINATE THE INFLUENCE OF CONTROLLED TRANSACTIONS. 7 COMPANIES THAT HAD EXCEPTIONAL YEAR(S) OF OPERATION IT WILL BE AN APPROPRIATE FILTER PROVIDED IF ONE GIVES REASON FOR SUCH EXCEPTIONAL PERFORMANCE. ALSO THE COMPANIES BEING SERVICE PROVIDERS, ONE MAY NOT GET EXCEPTIONAL SALES WITHOUT THE SERVICE BEING RENDERED ALSO EXCEPTIONAL I.E., ONE MAY NOT GET ANY INCOME WITHOUT DOING ANY WORK. 8 COMPANIES THAT ARE DUPLICATED IN THE DATABASE WITH DIFFERENT NAMES OR MERGED TO FORM ANOTHER COMPANY IT IS AN APPROPRIATE FILTER. HENCE, IT IS ACCEPTED. ITA NO.1054/BANG/11 PAGE 6 OF 62 6. THEREAFTER THE TPO WAS OF THE VIEW THAT IT WOULD BE APPROPRIATE TO APPLY THE FOLLOWING FILTERS FOR SELECTION OF COMPAR ABLES:- 10.8 FINAL FILTERS SELECTED BY THE TPO FOR SELECTI ON OF COMPARABLES: AS PER THE ABOVE DISCUSSION, THE FOLLOWING ARE THE FILTERS APPLIED BY THE TPO FOR MAKING THE COMPARABLES FUNCTIONALLY SIMILAR AND ALSO MAKING ECONOMIC CIRCUMSTANCES SIMILAR AS PER T HE PROVISIONS OF RULE 10B(2). THESE FILTERS INCLUDE TH E FILTERS THAT ARE APPLIED BY THE TAX PAYER AND ACCEPTED BY THE TP O. COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2006-07 WERE EXCLUDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT SERVICE REV ENUE